IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Another Look at Models of the Short-Term Interest Rate

  • Brenner, Robin J.
  • Harjes, Richard H.
  • Kroner, Kenneth F.
Registered author(s):

    The short-term rate of interest is fundamental to much of theoretical and empirical finance, yet no consensus has emerged on the dynamics of its volatility. We show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in conditional variances. On the other hand, serial correlation based models like GARCH models fail to capture adequately the relationship between interest rate levels and volatility. We introduce and test a new class of models for the dynamics of short-term interest rate volatility, which allows volatility to depend on both interest rate levels and information shocks. Two important conclusions emerge. First, the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature. While this relationship is important, adequately modeling volatility as a function of unexpected information shocks is also important. Second, we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified, and suggest new paths toward improving the theory.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://journals.cambridge.org/abstract_S0022109000000454
    File Function: link to article abstract page
    Download Restriction: no

    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 31 (1996)
    Issue (Month): 01 (March)
    Pages: 85-107

    as
    in new window

    Handle: RePEc:cup:jfinqa:v:31:y:1996:i:01:p:85-107_00
    Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
    Web page: http://journals.cambridge.org/jid_JFQ
    Email:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:31:y:1996:i:01:p:85-107_00. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.